xAnnual
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 2006,

or

oTransition report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

MERIT MEDICAL SYSTEMS,
INC.

(Exact name of registrant as specified in its charter)

Utah

0-18592

87-0447695

(State or other
jurisdiction

(Commission File
No.)

(IRS Employer

of
incorporation)

Identification
No.)

1600 West Merit Parkway

South Jordan, Utah 84095

(Address of
principal executive offices, including zip code)

Registrants
telephone number, including area code: (801) 253-1600

Securities
registered pursuant to Section 12(b) of the Act: Common Stock, No Par Value

Securities
registered pursuant to Section 12(g) of the Act: None

Indicate
by check mark if the registrant is a well-known seasonal issuer, as defined in
Rule 405 of the Securities Act. Yes o Nox

Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o Nox

Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x Noo

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation SK is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10K or any amendment to
this Form 10-K. x

Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer or a non-accelerated filer (Check
one):

Large accelerated
filer o

Accelerated
filer x

Non-accelerated
filer o

Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o Nox

The
aggregate market value of the registrants common stock held by nonaffiliates
of the registrant, on June 30, 2006, which is the last day of the registrants
most recently completed second fiscal quarter (based upon the closing sale
price of the registrants common stock on the NASDAQ National Market System on
June 30, 2006), was approximately $351,173 million. Shares of common stock held
by each officer and director of the registrant and by each person who may be
deemed to be an affiliate have been excluded.

As
of March 5, 2007, the registrant had 27,649,986 shares of the registrants
common stock outstanding.

DOCUMENTS
INCORPORATED BY REFERENCE

Portions
of the following document are incorporated by reference in Part III of this
Report: the registrants definitive proxy statement relating to the Annual
Meeting of Shareholders scheduled for May 23, 2007.

This
report includes forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the Securities Act), and Section
21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). All statements other than statements of
historical fact are forward-looking statements for purposes of these
provisions, including any projections of earnings, revenues or other financial
items, any statements of the plans and objectives of management for future
operations, any statements concerning proposed new products or services, any
statements regarding future economic conditions or performance, and any
statements of assumptions underlying any of the foregoing. All forward-looking statements included in
this report are made as of the date hereof and are based on information
available to us as of such date. We
assume no obligation to update any forward-looking statement. In some cases, forward-looking statements can
be identified by the use of terminology such as may, will, expects, plans,
anticipates, intends, believes, estimates,
potential, or continue, or the negative thereof or other comparable
terminology. Although we believe that
the expectations reflected in the forward-looking statements contained herein
are reasonable, there can be no assurance that such expectations or any of the
forward-looking statements will prove to be correct, and actual results could
differ materially from those projected or assumed in the forward-looking
statements. Future financial condition
and results of operations, as well as any forward-looking statements are
subject to inherent risks and uncertainties, including market acceptance of our
products, product introductions, potential product recalls, delays in obtaining
regulatory approvals, cost increases, fluctuations in and obsolescence of
inventory, price and product competition, availability of labor and materials,
development of new products and techniques that could render our products
obsolete, product liability claims, foreign currency fluctuations, changes in
health care markets related to health care reform initiatives, and other
factors referred to in our press releases and reports filed with the Securities
and Exchange Commission (the SEC). All
subsequent forward-looking statements attributable to us or persons acting on
our behalf are expressly qualified in their entirety by these cautionary
statements. Additional factors that may
have a direct bearing on our operating results are described under Item 1A. Risk
Factors beginning on page 13.

Item 1.Business.

GENERAL

Merit
Medical Systems, Inc. was formed in 1987 by a few members of our current
management to produce high quality single-use medical products. Our initial focus was on creating products to
be used by doctors in diagnosing and treating cardiovascular disease. Our early products were designed to enable
physicians and other health care professionals to perform interventional and
diagnostic procedures safely and effectively.
Early in our development, we were able to introduce innovative new
products and capture significant market share because of our expertise in
product design, our proprietary technology, and our skills in injection and
insert molding. Later, we developed an
innovative product line of angioplasty inflation products that included
electronic sensing and display features.
Angioplasty and stent placement are procedures used to clear out
blockages and blood clots in arteries by inserting and inflating a small
balloon in the clogged arteries. We
market these devices along with a group of sensor-based products designed to be
used by hospital personnel in various diagnostic and interventional
catheterization procedures.
Catheterization refers to the process of inserting a catheter, usually
into a patients arteries. Recently we
have expanded our product offerings to include angiographic catheters, guide
wires, needles, safety products, therapeutic infusion catheters and
accessories, drainage catheters and accessories, sheath introducers, pressure
infusion bags, syringes, kits, and procedure trays. Additionally, we have sought to improve on
our line of core products.

We offer a broad
line of innovative, disposable products designed to assist physicians in
diagnosing disease and intervening in the areas of radiology and cardiology. Sales of new and existing products are
increasing both in the United States and in foreign markets. In the long run, we look to create new
products based on our sensor-based technologies, plastics molding, catheter,
guide wire, and electronic capabilities, and to develop

1

products for
diagnostic and interventional procedures in additional markets. Our sales of stand-alone products, in
combination with custom kits, have increased as we have expanded our product
lines. In 2006, our U.S. domestic sales force made approximately 43% of our U.S.
sales directly to U.S. hospitals and approximately 15% of U.S. sales through
other channels such as U.S. customs packagers and distributors. Original
equipment manufacturers, or OEM, companies accounted for approximately 14% of
our 2006 sales. Approximately 28% of our sales in 2006 were made in
international markets.

Our
Company was organized in July 1987 as a Utah corporation. In July 1994, we purchased a controlling interest
in Merit Sensor Systems, Inc. (formerly Sentir, Inc.) (Merit Sensor Systems),
a California-based manufacturer of silicon sensors, and during 1999, we
purchased the remaining interest in Merit Sensor Systems, Inc. We have established subsidiaries in Ireland,
Germany, France, the United Kingdom, Belgium, The Netherlands, Denmark and
Sweden to conduct international business.
In January 1997, we purchased the operating assets and product lines of
Universal Medical Instruments Corp, or UMI.
In August 1999, we purchased the operating assets and product lines of
the Angleton, Texas division of Mallinckrodt Inc. In 2000, we purchased the assets of Electo
Catheter Corp., also known as Elecath.
In November 2004, we purchased substantially all of the assets of
MedSource Packaging Concepts LLC (MedSource).
In March 2005, we bought substantially all of the assets of Sub-Q, Inc (Sub-Q). During the fourth quarter ended December 31,
2006, the Company determined it was not likely that it would pursue the product
associated with the intellectual property and assets purchased from Sub-Q due
to other priorities and opportunities.
Therefore, the Company recorded an impairment charge of approximately
$929,000 during the quarter of 2006 related to Sub-Q. On December 30, 2005, we acquired all of the
capital stock of MCTec Holding B.V, a Dutch company in the business of coating
wires and tubings for medical devices (MCTec). In March 2006, we purchased a hemostasis
valve product line from Millimed A/S and Millimed Holdings, Inc. (Millimed). In April 2006, we purchased a
safety scalpel product line from Hypoguard USA, Inc. and Medisys PLC (Hypoguard). Our principal offices are located in
manufacturing and office facilities at 1600 West Merit Parkway, South Jordan,
Utah, 84095, and our telephone number is (801) 253-1600. See Item 2. Properties.

PRODUCTS

We have designed and developed our products in
response to the needs of customers and patients. We identify these needs primarily by
observing procedures in cardiac catheterization and radiology laboratories, by
consulting with our medical advisors and consultants, and by communicating
directly with customers. Since 1988, we
have developed and introduced several product lines, including the following:

These
products are sold separately, and many are sold in custom kits consisting
primarily of selected combinations of products.

We
have not experienced any significant product liability claims; however, the
sale and use of our products entail inherent risks that customers may assert
product liability claims against us. We
maintain product liability insurance in the amount of $10,000,000 per
occurrence and $10,000,000 in the aggregate, which may not be adequate to cover
potential expenses or liabilities we could incur if we face a products
liability claim. We also maintain
product liability insurance for events in the United Kingdom in the amount of
5,000,000 GBP (Great Britain Pounds) per occurrence and in the aggregate, which
also may not be enough to cover our actual expenses or liabilities.

The
following paragraphs briefly describe and provide other information regarding
our products:

Inflation Devices and Angioplasty Accessories. Angioplasty is a procedure
used to clear blockages in arteries by inserting and inflating a small balloon
in the clogged arteries. Our inflation
devices are large, specialized syringes used to inflate balloon-tipped
catheters in angioplasty procedures. Our
inflation devices incorporate patented, proprietary design features which
contribute to their ease of use, including features that allow clinicians to
engage or release the syringe plunger with one hand. Each syringe also provides a clear view of
the fluid path, which makes it easier for the user to debubble and to
accurately measure the pressure in the syringe.

Our
IntelliSystem® inflation device, which we believe was the first such device to
incorporate electronic sensing and display features, is a disposable 20cc
inflation syringe with an internal pressure transducer which connects to a
monitor outside of the sterile field.
The IntelliSystem® monitor measures, times, records, and digitally
displays information concerning the pressure, duration and number of each inflation
and deflation of the angioplasty balloon.
We believe that electronic sensing and display of such information is
more accurate and precise than most conventional analog gauges. By using electronic sensors, important data
can be stored and later retrieved, displayed and printed.

In
2003, we launched the patented IntelliSystem II color monitor, an advanced
balloon inflation system. It gives
physicians several desirable options, including a large color touch screen, an
instant readout of positive and negative pressures, and an enlarged graphing
display to show subtle changes in pressure measurements. In addition, the readouts are available in
four languages. The user can change
settings and programming by simply touching the screen. We believe we are the only company with
digital technology sensitive enough to show subtle changes in pressure.

The
Monarch® is a disposable inflation device that digitally displays data
concerning pressure and duration of inflations and deflations on a small
digital readout mounted on the barrel of the inflation syringe. This small digital readout monitor does not
offer the same display, storage or printing capabilities of the
IntelliSystem® and IntelliSystem II,
but does offer the convenience of portable, digital operation. In 2003 we launched a 30-atmosphere version
of the Monarch® to provide clinicians with additional options.

3

The
Viceroy®, Basix and the BasixCompak are
disposable inflation syringes that incorporate conventional analog pressure
gauges mounted on the barrels of inflation syringes. The Basix resembles devices marketed by our
competitors, but includes our proprietary design features and benefits. We believe the Basix and BasixCompak
represent significant additions to our line of inflation devices and will
contribute to increased sales where both clinical outcomes and pricing are
priorities.

Hemostasis Valves. Hemostasis refers to the stoppage of bleeding
in an injured blood vessel. We sell a
line of hemostasis valves designed to complement our inflation devices. These valves are also sold as a part of our
angioplasty product packages. This line
of valves includes the MBA, Passage®, AccessPlus, Access-9, Double
Play, and Honor® hemostasis valves.
These valves are made of clear polycarbonate plastic for strength and
clarity; however, the devices vary in size and function. The MBA and Honor® feature a valve mechanism
that minimizes blood loss during exchange of wires, catheters and other tools
through the valve. The Access Plus and
Access-9 are large-bore configurations.
The Double Play incorporates a double Y configuration for
kissing-balloon techniques.

Torque Devices. Our
standard torque device used in interventional procedures is a guide wire
steering tool with a tapered design and contrasting colors for improved
visibility. The torque device typically
is included as a component of our angioplasty packs. We also provide a variety of torque devices
used for diagnostic and hydrophilic guide wires (H20 Torq).

Coronary Control Syringes. Our disposable control syringes are utilized
for one-handed control of the injection of contrast media and other fluids
during angiography, angioplasty, and stent placement. A stent is a device that is inserted into a
vessel or passage to keep it open and prevent closure due to stricture or
external pressure. Control syringes are
molded from polycarbonate material, which is tougher than glass and most other
plastics used in the medical products industry.
We offer different models and sizes of control syringes with varying
features, according to physician preference.
These features include different configurations of syringe handles,
plungers, and connectors which allow operation of the syringe in a fixed or
rotating position and varying volume sizes.
In response to customer need and request for smaller diameter diagnostic
and guiding catheters, we have also developed several designs of control
syringes that provide the user with higher injection pressures. All of our control syringes are latex-free.

Specialty Syringes. Our
Medallion® syringes, a line of disposable, latex-free, color-coded specialty
syringes, are used for injection of medications, flushing manifolds and other
general purposes. These syringes are molded
of polycarbonate material for added strength and are available in hundreds of
sizes, colors and custom printing combinations.
We color-code our syringes to minimize medication errors; color-coding
allows doctors to assign a color for each medication to be dispensed and to
differentiate syringes by their contents.
Our Medallion® syringes can be customized with medication names and
strengths to meet the requirements set forth by the Joint Commission on
Accreditation of Healthcare Organizations, or JCAHO, and other governing
bodies. The VacLok® syringe is used to
create negative pressure. There are
multiple clinical applications for a negative pressure syringe, including abscess
drainage and biopsy, balloon preparation, nephrostomy drainage, and more. We believe that the design, color-coding and
materials used in our specialty syringes contribute to patient safety and more
efficient procedures. We sell the
specialty syringes separately as well as in our custom kits.

Marquis® Series Stopcock. Our Marquis® Series Stopcock offers
improvements to competitive stopcock devices, including a large, easy-grip
handle. Stopcocks are manufactured in
numerous design configurations and styles, including 1-way, 3-way, 4-way, 50
pounds per square inch (psi) to 1050 psi, on and off handles, fixed luer,
rotating luer, and slip luer.A large-bore stopcock is designed
to facilitate fluid movement. The large
internal diameter, measuring 0.120 inches, is designed to move drainage fluid
from the body. Like all of our stopcocks,
the large-bore version incorporates a clear body for easy visualization and a
large, easy-to-manipulate, handle. We
have also incorporated this stopcock in several other products such as pressure
infusor bags and drainage kits.

Manifolds.
Manifolds have a series of valves which control the flow of various
fluids. Manifolds are generally used to
administer saline, imaging, and contrast fluids, as well as to manage
blood-pressure, fluid injection and waste collection in angiography or
angioplasty procedures. We have designed
our own manifold products consisting of one, two, three, four, or five
valves. When compared to manifolds sold
by competitors,

4

we believe that
our manifold is easier to use, simplifies identification of flow direction, and
provides leak-free operation under the pressures of manual or mechanical fluid
injection. Our manifold is sold
separately as well as in our custom kits.

High-Pressure Contrast Injection Line. During angiographic and diagnostic radiology
procedures, contrast media is injected through a catheter into a patients
artery or vein. This is sometimes
accomplished by a mechanical injector which can generate pressures up to 1200
psi and requires tubing that can withstand these pressures. We offer high-pressure, braided and clear,
specialty tubing. Excite is a line of
clear, flexible, high-pressure tubing that combines the features of tubing
clarity and strength. We currently offer
specialty tubing that can handle pressures ranging from 500 to 1200 psi. High pressure tubing is an important
component of custom kits.

Waste Containment Systems. Because of heightened awareness of the risks
associated with blood and related waste materials, hospitals have moved toward
closed systems whenever possible. To
address these concerns, we have designed a waste containment bag which connects
to a manifold in a closed system and collects waste materials such as blood and
other fluids during angioplasty or other procedures. Our Disposal Depot is self-contained for
simplified disposal and reduced risk of contamination. The Backstop® and Backstop Plus are unique
and proprietary alternative fluid disposal basins designed to reduce exposure
to blood-borne pathogens. The MiniStop
and MiniStop+ are designed to meet the needs of clinical procedures that
accumulate smaller volumes of waste. The
DugOut®, a large volume (1000 ml) line extension to the Backstop®, also
contains an additional compartment for the storage of accessories. The Triple Play combines the features of a
covered waste basin, an absorbent catch basin, and ancillary product tray.

Contrast Management Systems. The Miser and the In-Line Contrast
Management System are designed to reduce the waste of various contrast media
and increase catheterization lab efficiencies.
The Miser systems blue fluid level indicator disk is designed to
minimize air from entering the contrast line and to potentially be injected
into the patient. We believe that this
small system helps hospitals save thousands of dollars a year in wasted
contrast.

Majestik® Angiographic Needles. The angiography needle creates the
percutaneous (through the skin) access site for virtually all invasive
diagnostic and interventional procedures performed in cardiology and
radiology. The needle provides the
initial point of entry site for the introducer sheath, guide wires, catheters
and any other diagnostic and interventional devices. Our Majestik® and Merit Advance needles help
physicians achieve precise vascular access with one of the sharpest angiography
needles on the market.

Majestik® and SecureLoc Shielded Angiography Needles. The Needlestick Safety and
Prevention Act passed by the United States Congress in November 2000 requires
healthcare employers to document their exposure control plan and evaluate
safety-engineered products to protect clinicians. In 2002, we launched a new line of shielded,
18-gauge angiography introducer needles designed to meet the requirements of
the law. We believe that the Majestik®
Shielded Needle is one of the first safety-engineered devices designed to
promote safer needles in cardiology and radiology. The SecureLoc Shielded Needle (trademark of
Specialized Health Products International, Inc.) launched in 2005 provides a
second clinical alternative. We launched
the A.S.K. Merit Safety Access Kits in early 2003, which include protected
scalpels and needles used for vascular access.

Fountain® and Mistique® Infusion Catheters. Vascular occlusion is a
common anomaly that affects millions of patients each year. Both the Fountain® and the Mistique®
catheters deliver therapeutic solutions intended to dissolve blood clots in
peripheral arteries, hemodialysis grafts and deep veins. The Fountain® catheter utilizes an occluding
wire to effectively block off the end hole and direct the infusion therapy
uniformly through the laser-drilled side holes.
The Mistique® is designed to be used over standard 0.035 or 0.038 inch
guide wires to block off the end hole and direct the infusion therapy uniformly
through the side holes.

5

Squirt®
Fluid Dispensing System.
The Squirt® fluid dispensing system is a unique and proprietary product
designed to deliver fluid in a controlled, accurate and consistent manner. The device is available stand-alone as well
as packaged with the Fountain® Catheter.

Prelude®
and DialEase® Introducer Sheaths. In 2005, we launched the Prelude®
Sheath Introducer, a new beginning in vascular access. The product was specifically designed to meet
customer requirements. The DialEase® Introducer Sheath (a registered
trademark of Thomas Medical) is a short introducer ideally suited for dialysis
graft intervention. It is commonly used
in conjunction with the Fountain® and Mistique® therapeutic infusion catheters
to declot dialysis grafts and as and acute hemodialysis catheter.

Merit MAK and Merit
S-MAK Mini Access Kits. In 2004, we introduced the Merit MAK Mini
Access Kit for those clinical applications requiring small, 21-gauge needle
introduction. Kit configurations provide
the necessary components for vascular access.
In 2006 the S-MAK was launched with a stiffened version of the standard
product.

Vessel Dilators and Obturators. Dilators are used to dilate puncture
sites. They are commonly used in
radiology and cardiology over a 0.035 or 0.038 inch guide wire to dilate the site
prior to placing sheaths and catheters.
Obturators are used to maintain, sheath patency and improve patient
comfort.

InQwire® Diagnostic Guide Wires. Guide wires consist of a
small-diameter wire tightly wrapped in a coated wire coil. Production of these wires requires
considerable technology, and we utilize our guide wire center of excellence in
Ireland to manufacture the InQwire® Diagnostic Guide Wire. Guide wires vary in length, outside diameter
and tip configuration, and are used to place either a diagnostic or therapeutic
catheter into a patient.

RingMaster. The RingMaster guide
wire basin allows clinicians to conveniently store guide wires to maintain
sterility and organization. It separates
wires for quick selection, uses less table space than conventional basins because
it is stackable, and helps keep wires hydrated throughout the procedure.

Pericardiocentesis
Kit. On occasion, the
pericardial sac surrounding the heart becomes filled with blood or fluid. To remove the fluid and the potential for
heart strangulation, a catheter is placed in the pericardial sac to drain the
excess fluid. We offer a complete
pericardiocentesis kit that combines a high-flow drainage catheter with all
components needed to place the device in the pericardial sac. We believe that the kit combination saves
physicians both time and money by having all components in one convenient tray.

One-Step
Centesis Catheter. The
One-Step centesis catheter is intended to be used for short-term centesis
procedures. It incorporates a
luer-locked introducer needle for secure, one-handed placement. The tip of the introducer needle is
echogenically enhanced for visualization during ultrasound-guided
placement. The transition between the
catheter and needle is smooth to facilitate insertion. In 2003, we launched a line of safety kits,
including the One-Step centesis catheter.

Resolve® Universal Drainage Catheter with Locking and
Non-Locking Pigtail. The
Resolve® Universal Drainage Catheter with non-locking pigtail is a standard
drainage catheter designed to expand our drainage products offerings. In 2006, we expanded the drainage catheter
offerings to include a full line of proprietary locking catheters.

Revolution and StayFix®  Catheter Fixation Devices. The Revolution is the most recent addition to our drainage
accessory line of products. The
Revolution is a three-point catheter fixation device that allows visibility of
the puncture site. The StayFix® is a
one-piece catheter tube securing device and dressing for percutaneous drainage
sites. These products provide
comfortable, low-profile fixation for catheters and tubes. Catheter securement devices are used in
interventional radiology, special procedures, cardiology, urology, home health
care, and skilled nursing facilities.

6

Drainage Depot. Our Drainage Depot
is specifically designed to temporarily collect fluids. It incorporates a drainage spout for quick
and easy fluid disposal, and an internal anti-reflux valve to help prevent
fluid from backing up the line. The bag
also comes packaged with an adjustable Velcro® strap that can be used to attach
the device to the patients waist or leg.

Meritrans® Pressure Transducer and Accessories. Diagnostic blood pressure
monitoring is a critical priority in virtually all diagnostic and
interventional procedures. We believe
the Meritrans® provides clinicians with reliable and precise blood pressure
measurement and that the clear flow-through design makes flushing and
debubbling simple and safe. The
transducer is a vital component of many custom kit configurations. Pressure monitoring tubing and stopcocks are
common ancillary products to complement the Meritrans®.We
provide several reusable accessories to support the Meritrans®. The Merit Mentor is a transducer calibration
and troubleshooting device that insures accuracy and repeatability of
physiologic pressure measurements.
Reusable transducer cables connect the Meritrans® to the bedside
monitor. Organizing brackets hold
multiple transducers to beds and IV poles according to the needs of the user.

Pressure Infusor Bag. Our
pressure infusor bags include proprietary over-pressure relief valves. These devices are used in multiple clinical
areas to apply pressure to a sealed bag of fluid, such as IV solutions or blood
products. The pressure exerted is shown
by a color-coded pressure gauge, and the device has a valve that releases
pressure to prevent inadvertent over-pressurization. The device also has patented technology that
allows the user to choose between 300 and 400 mmHg of pressure exerted on the
bag.

ShortStop® and ShortStop Advantage. The ShortStop® and
ShortStop Advantage are small temporary sharps containers with an adhesive
base that fits on the back table in a clinical lab, used for the temporary
containment of needles, scalpels and other sharp tools to help prevent
inadvertent clinician injury. Smaller
versions of the ShortStop® have recently been added as differentiating features
to the Backstop+ and MiniStop+. The
ShortStop Advantage incorporates an additional side loading feature.

Universal Fluid Dispensing Syringe. In addition to angioplasty, angiography, and radiology, our
digital inflation devices (IntelliSystem® and Monarch® products) can be used in
additional clinical applications such as discography, esophageal dilatation,
trigeminal nerve compression and the repair of retinal detachment. Universal fluid dispensing syringes incorporate
patented, proprietary features designed to increase ease of use, including
features allowing clinicians to engage or release the syringe plunger with one
hand while increasing or decreasing pressure.
Each syringe also provides a clear view of the fluid path that
simplifies debubbling and contributes to accurate pressure measurement. When used in clinical applications such as
discography, the IntelliSystem® accurately dispenses fluid while documenting
and graphing pressures in the disc. We
believe that electronic sensing display of such information is more accurate
and precise than standard syringes and conventional analog gauges. The electronic sensor stores data, which can
be retrieved, displayed, graphed and printed.

Diagnostic Cardiology Catheters. Doctors perform cardiac catheterization to diagnose the nature,
severity, and precise location of blockages and other abnormalities of the
heart. We believe this technique is the
most essential diagnostic tool in managing patients with cardiovascular disease. We manufacture both the Performa® and
Softouch® line of diagnostic catheters used for these procedures.

Diagnostic Peripheral Radiology Catheters. The Impress®, Performa®, and Softouch® peripheral catheters are
engineered and designed with distinct tip configurations to access specific
vessels and organs outside the heart (head, kidneys, legs, etc). We acquired a series of peripheral catheter
products from Mallinckrodts Angleton division in 1999. Since then, we have invested in significant
product improvements and line extensions, including MultiPACK Plus catheters with wires and sheaths.

Vessel-Sizing Catheters. Our adult vessel-sizing catheters are used to
measure the internal diameters and lengths of blood vessels under
fluoroscopy. Procedures in which these
catheters are used include angioplasty, embolization, abdominal aortic aneurysm
(AAA) stent-grafts and vena cava filter placements. We also offer pediatric vessel-sizing
catheters.

7

Medication Labeling System. The Merit PAL (pen and
labels) is a strategically designed medication labeling system that complies
with JCAHOs latest patient safety goals.
The labels have been designed to be placed on syringes, medicine cups,
bowls and other procedural basins that hold fluids and drugs.

Custom Kits. Custom kits allow physicians to obtain the
medical devices and accessories they most frequently use during angiography,
angioplasty and similar procedures in a convenient, pre-packaged and
preassembled form. Custom kits also
provide cost savings over purchasing single products and reduce hospitals
administrative costs associated with maintaining inventory of individual
sterile products.

Procedural Trays and Packs. Our 2004 acquisition of the Medsource assets
enabled us to add a new level of service to customers through the distribution
of a comprehensive line of custom procedure packs and trays.

MARKETING
AND SALES

Target Market/Industry. Cardiovascular disease continues to be a
leading health problem in the United States.
According to American Heart Association estimates, almost 80 million
Americans, or approximately 28% of the population, have one or more types of
cardiovascular disease. Cardiovascular
disease accounts for almost 900,000 deaths annually, more than 36% of the U.S.
total. We derive a majority of our sales
revenues from products used in angiography and angioplasty procedures designed
to treat cardiovascular disease. We
believe that the greatest potential to diagnose and treat the disease comes
from the use of transcatheter technologies, meaning products utilizing vascular
catheterization procedures such as balloons, bare metal and drug eluding
stents, and technologies aimed at defect repair. We intend to pursue additional sales growth
by building on our existing market position in both catheter technology and
accessory products.

The
global market for transcatheter products stands at a major crossroad, even when
considering the continued dynamic evolution in vascular stent placement. The core diagnostic and therapeutic
applications for basic transcatheter technologies (balloons, stents and defect
repair) are well established, with the future growth of procedures and products
dependent upon demographic trends.
Several companies, however, are researching and developing new
technologies and applications designed to enhance patient outcomes and enable
the treatment of new populations that have been traditionally limited to
surgical intervention. Much of this
additional research and development has led to new or enhanced procedures,
devices and drugs designed to treat or prevent cardiovascular disease. These procedures, devices and drugs include
laser angioplasty, atherectomy procedures and drug therapies. Because these new procedures and therapies do
not involve the use of catheterization, they may either render some of our
products obsolete or limit the markets for our products. However, with the advent of vascular stents
and other procedures, such as discography and kyphoplasty, we have experienced
continued growth in our proprietary inflation technology. We are monitoring trends in the industry and
believe that we are in a position to launch catheters and accessories to
support growing clinical applications.

A
large number of current research and development projects focus on improving
the diagnosis of cardiovascular disease, improving the issue of restenosis, and
developing other less invasive alternatives to open-heart surgery. In recent years, researchers have focused their
interests on technologies and products that support the increased use of
transcatheter approaches to reduce the mortality rate of cardiovascular
disease. These new technologies and
procedures include drug-coated stents, radiated stents and balloons, anti-platelet
therapy, gene therapy, percutaneous coronary thrombectomy, and transmyocardial
revascularization. One area of specific
interest to us is transradial catheterization, in which a doctor introduces
vascular catheters through the radial artery, allowing a patients rapid
mobility, which ultimately reduces total patient cost. We plan to continue to develop and launch
innovative products to support these clinical trends.

Market Strategy. Our marketing strategy is focused on
identifying and introducing a continual flow of highly profitable
differentiated products that meet customer needs. In order to stay abreast of customer needs,
we seek suggestions from hospital personnel working with our products in
cardiology and radiology applications.
Suggestions for new products and product improvements may come from
engineers, sales people, physicians and technicians who perform the clinical
procedures.

When
we determine that a product suggestion demonstrates sustainable competitive
advantage, meets customer needs, fits strategically and technologically with
our business, and has a good potential financial return,

8

we assemble a project
team comprised of individuals from our marketing, engineering, manufacturing,
legal, and quality assurance departments.
This team identifies the customer requirements, integrates the design,
compiles all necessary documentation and testing, and prepares the product for
market introduction. We believe that one
of our marketing strengths is our capacity to rapidly conceive, design,
develop, and introduce new products.

U. S. Sales. Sales of our products in the United States
accounted for 72%, 73% and 75% of our total sales for the years ended December
31, 2006, 2005 and 2004, respectively.
Our direct sales force currently consists of a Vice President of Sales,
eight regional sales managers and 63 direct sales representatives and clinical
specialists located in major metropolitan areas throughout the United
States. Our sales people are trained by
personnel at our facilities, by a senior sales person in their respective
territories, at regular national and regional sales meetings, by consulting
cardiologists and employees of the Company, and by observation of procedures in
catheterization laboratories.

International Sales. Approximately 100 independent dealer organizations
distribute our products worldwide, including territories in Europe, Africa, the
Middle East, Asia, South and Central America, and Canada. We have appointed a Vice President for
International Sales outside Europe and the United States. We also have a Vice President of European
Sales and an international sales and distribution office in Maastricht, The
Netherlands. Approximately 20 direct
sales representatives and country managers presently sell our products in
Germany, France, the United Kingdom, Belgium, The Netherlands, Denmark, Sweden,
and Ireland. In 2006, our international
sales grew approximately 18% over our total sales for the years ended December
31, 2005 and 2004, respectively, and accounted for approximately 28% of total
sales. With the recent and planned
additions to its product lines, we believe that our international sales will
increase.

We
generally require our international dealers to inventory products and sell
directly to customers within defined sales territories. Each of our products must be approved for
sale under the laws of the country in which it is sold. International dealers are responsible for
compliance with all applicable laws and regulations in their respective
countries.

OEM Sales. We
currently have an OEM division that sells molded components, sub-assembled
goods, and bulk non-sterile goods, which may be combined with other components
and/or goods from other companies and then sold under a Merit or non-Merit
label. We engage in both international
and domestic OEM sales.

CUSTOMERS

We
serve hospital-based cardiologists, radiologists, anesthesiologists,
physiatrists (pain management physicians), neurologists, technicians, and
nurses, all of whom influence the purchasing decisions for our products. Hospitals and acute care facilities in the
United States purchase our products through our direct sales force,
distributors, OEM relationships, custom packagers and packers who assemble and
combine products in custom kits and packs.
Outside the United States, hospitals and acute care facilities purchase
through our direct sales force, or in the absence of a sales force, through
independent distributors or OEM relationships.

In 2006, our U.S. domestic sales force made approximately 43% of our U.S.
sales directly to U.S. hospitals, and they made approximately 15% of U.S. sales
through other channels such as U.S. customs packagers and distributors. Approximately 28% of our sales were
made by our direct European sales force, international distributors, and our
OEM sales force to international markets. Sales to our single largest
customer, a packer, accounted for approximately 6% of total sales during the
year ended December 31, 2006. We generally manufacture products for other
medical device companies through our OEM program. During the year ended
December 31, 2006, OEM sales represented approximately 14% of our total
revenue, including approximately 8% of which was purchased by international OEM
companies.

RESEARCH
AND DEVELOPMENT

We believe that
one of our historic strengths has been our ability to quickly adapt our
expertise and experience in injection molding, insert molding, catheter
extrusion and tipping, guide wire assembly, and electronic and sensor
technologies, and to apply these core competencies toward innovative new
products and product improvement. Our
development efforts are presently focused on disposable, single-patient or
single-use items, which can be included in our custom kits or sold separately.

9

Our
Chief Executive Officer frequently devotes a portion of his time to research
and development. Research and
development expenses were approximately $8.6 million, $7.0 million, and $5.1
million in 2006, 2005, and 2004, respectively.
We did not conduct any customer-sponsored research and development
during those periods. We anticipate that
our research and development expenses will range between approximately 4% and
5% of net sales during the year ending December 31, 2007.

MANUFACTURING

We
manufacture many of our products utilizing our proprietary technology and our
expertise in plastic injection and insert molding. We generally contract with third parties for
the tooling of molds, but we design and own all of our molds. We utilize our experience in injection and
insert molding technologies in the manufacture of most of the custom components
used in our products.

We
either assemble the electronic monitors and sensors used in our IntelliSystem®
and Monarch® inflation devices from standard electronic components or we
purchase them from suppliers. In July
1994, we acquired a 73% interest in Merit Sensor Systems, which develops and
markets silicon sensors. In August 1999,
we acquired the remaining interest in that company. It is presently supplying virtually all of
the sensors we utilize in our digital inflation devices.

Our
products are manufactured at several factories including facilities located in
South Jordan and Murray, Utah; Santa Clara, California; Galway, Ireland; Venlo,
The Netherlands; Angleton, Texas; and Chester, Virginia. Our manufacturing capabilities are being
expanded into a contract manufacturing facility in Mexico. See Item 2. Properties.

We
believe that our variety of suppliers for raw materials and components
necessary for the manufacture of our products, as well as our long-term
relationships with such suppliers, promote stability in our manufacturing
process. Historically, we have not been
materially affected by interruptions with such suppliers. Furthermore, we have developed contingency
plans to engage back-up suppliers, materials and components in the event of
supply interruptions.

COMPETITION

We compete in the domestic and international
cardiology and radiology markets, which encompass a large number of suppliers
of many different sizes. We compete with
more than 30 different companies. These
firms include small firms, such as Possis Medical and Angio Dynamics; medium-sized
companies like Cook, Arrow, and ICU Medical; and large, international,
multi-supply medical companies, such as Johnson & Johnson, Boston
Scientific, Medtronic, and C.R. Bard.
Many of our competitors have substantially greater financial, technical,
and marketing resources than we do.

The
principal competitive factors in the markets in which our products are sold are
quality, performance, service, breadth of line, and price. We believe that our products have achieved
market acceptance due, in part, to the quality of materials and workmanship,
innovative design, ease of operation, and our prompt attention to customer
inquiries. Our products are priced
competitively, but generally not below prices for competing products. One of our primary competitive strengths is a
comprehensive, broad line of ancillary products used in both cardiology and
radiology.

Based
on available industry data with respect to the number of procedures performed,
we believe that we are one of two market leaders in the United States for
control syringes, tubing, and manifold kits (together with NAMIC USA
Corporation, a subsidiary of Boston Scientific), and we are the world market
leader for inflation devices and hemostasis accessories. We also believe that the recent and planned
additions to our product lines will enable us to compete more effectively in
both U.S. and international markets. For
example, our IntelliSystem® II color monitor provides considerable
improvements, including visibility of pressure data in our existing, patented,
digital technology. We believe that we
are a leading provider of digital inflation technology in the world. There is no assurance, however, that we will
be able to maintain our existing competitive advantages or compete successfully
in the future.

10

We derive a substantial
majority of our revenues from sales of products used in diagnostic angiography
and interventional angioplasty and stent procedures. Medical professionals are starting to use
newer procedures, devices, and drugs for the treatment and prevention of
cardiovascular disease such as laser angioplasty, atherectomy procedures, and
drug therapies, the effect of which may be to render some of our products
obsolete or to limit the markets for our products. However, with the advent of vascular stents
and other procedures, we have experienced continued growth in proprietary
inflation technology.

PATENTS,
LICENSES, TRADEMARKS AND COPYRIGHTS

We
consider our proprietary technology to be important in the development and
manufacture of our products. We seek to
protect our technology through a combination of patents, trademarks, trade
secrets, copyrights, and confidentiality agreements. We generally seek patent protection of our
technology in the United States and certain foreign countries where such
protection appears to be advantageous.
We have received 108 issued U.S. and foreign patents, and other U.S. and
foreign patent applications are currently pending. Fifteen U.S. and foreign patents were issued
to us during 2004, 2005 and 2006. These
patents are directed to the following innovations:

We
believe that our patents and pending patent applications are materially
important to our business, but we do not believe that our business is dependent
on securing such patents. We also operate
under licenses from other owners of certain patents, patent applications,
technology, trade secrets, know-how, copyrights, or trademarks. We believe, however, that no single patent,
patent application, technology, trade secret, know-how, copyright, trademark,
or license is material in relation to our business as a whole.

Although
certain of our patents related to inflation devices will expire in 2008 and
other patents will expire thereafter, we expect that related products will
continue to be valuable, in part because of proprietary innovations made since
the issue of the initial patent. In
1992, we were granted a license to use the patented IntelliSystem® and Monarch®
inflation devices. In return, we are
paying a 5.75% ongoing royalty to the licensee, not to exceed $450,000
annually.Royalties
paid for such license in each of 2006, 2005 and 2004 were $450,000.

While
we have obtained U.S. patents and filed additional U.S. and foreign patent
applications, there can be no assurance that any patents we hold will provide
us with any significant competitive advantages, that third parties will not
challenge our patents, or that patents owned by others will not have an adverse
effect on our ability to conduct business.
We could incur substantial costs in preventing patent infringement, in
curbing the unauthorized use of our proprietary technology by others, or in
defending against similar claims of others.
Since we rely on trade secrets and proprietary know-how to maintain our
competitive position, there can be no assurance that others may not
independently develop similar or superior technologies.

We
operate in an increasingly competitive medical technology marketplace. There has also been substantial litigation
regarding patent and other intellectual property rights in the medical device
industry. There

11

are risks that our
activities may require us to defend against claims and actions alleging
infringement of the intellectual rights of others. If a court rules against us in any patent
litigation, any of several negative outcomes could occur: we could be subject
to significant liabilities, we could be forced to seek licenses from third
parties, or we could conceivably be prevented from marketing certain
products. Any of these outcomes could
have a material adverse effect on our business.

We
have also registered or applied for registration of several trade names or
trademarks. See Products above. We have received 139 U.S. and foreign
trademark registrations, and other U.S. and foreign trademark applications are
currently pending. We place copyright
notices on our instructional and advertising materials and have registered
copyrights relating to certain software used in our electronic inflation
devices.

REGULATION

The
U.S. Congress has passed the Federal Food, Drug, and Cosmetic Act (the Food,
Drug and Cosmetic Act). Under the Food,
Drug and Cosmetic Act, and through its own rules, the U.S. Food and Drug
Administration (FDA) regulates the development, testing, packaging, labeling,
and marketing of medical devices and manufacturing procedures relating to these
devices. In general, the FDA requires
that manufacturers adhere to certain standards designed to ensure the safety
and effectiveness of medical devices. We
employ a Vice President of Regulatory Affairs and a Vice President of Quality
Systems who are responsible for compliance with all applicable FDA
regulations. Although we believe that we
are currently in material compliance with these requirements, any failure on
our part to comply with all applicable current and future regulations could
adversely affect our business.

The FDAs Quality
Systems Regulations define the requirements for our manufacturing processes,
require the maintenance of certain records, and provide for unscheduled
inspections of our facilities. We must
also comply with certain requirements of state, local, and foreign governments
in the manufacture and marketing of the Companys products.

New
medical devices may also be subject to either the Section 510(k) Pre-Market
Notification regulations or the Pre-Market Approval (PMA) regulations
promulgated by the FDA and similar regulatory authorities in foreign
countries. New products in either
category require extensive documentation, careful engineering, and
manufacturing controls to ensure quality.
Products needing PMA approval require extensive pre-clinical and
clinical testing and approval by the FDA prior to marketing. Products subject to the Section 510(k) of the
Food Drug and Cosmetic Act require FDA clearance prior to marketing. To date, our products have required only
compliance with Section 510(k). Most of
our products are subject to foreign regulatory approvals before they may be
marketed abroad. We place the CE mark
on devices sold in Europe. The CE mark represents that a product has met EU
health, safety, and environmental requirements,
We have received ISO 13485 certification for our Utah and Texas
facilities. We have received EN ISO 13485
certification for our Galway, Ireland facility. We have also received ISO
9001:2000 certification for our Merit Sensor Systems. facility in Santa Clara,
California.

EMPLOYEES

As of December 31,
2006, we employed 1,709 people, including 1,278 in manufacturing; 145 in sales
and marketing; 169 in engineering, research and development; and 117 in
administration.

Many
of our present employees are highly skilled.
Our failure or success will depend, in part, upon our ability to retain
such employees. We believe that an
adequate supply of skilled employees is available. We have, from time-to-time, experienced rapid
turnover among our entry-level assembly workers, as well as occasional
shortages of such workers, resulting in increased labor costs and
administrative expenses related to hiring and training replacement and new
entry-level employees. All of our
employees are bound by confidentiality policies. None of our employees are represented by a
union or other collective bargaining group.
We believe that our relations with our employees are generally good.

12

AVAILABLE INFORMATION

We file annual, quarterly and current reports and
other information with the SEC. These
materials can be inspected and copied at the SECs Public Reference Room at 100
F Street, N.E., Washington, D.C. 20549.
Copies of these materials may also be obtained by mail at prescribed
rates from the SECs Public Reference Room at the above address. Information about the Public Reference Room
can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address of the SECs Internet site is
www.sec.gov.

We make available, free of charge, on our Internet
website, located at www.merit.com, our most recent Annual Report on Form 10-K,
our most recent Quarterly Report on Form 10-Q, any current reports on Form 8-K
filed since our most recent Annual Report on Form 10-K, and any amendments to
such reports as soon as reasonably practicable following the electronic filing
of such report with the SEC. In
addition, we provide electronic or paper copies of our filings free of charge
upon request.

FINANCIAL
INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

For financial information relating to our foreign and
domestic sales, transfers between geographic areas, net income and identifiable
assets, see Note 11 to our consolidated financial statements set forth in Item
8 of this report.

Item
1A. Risk Factors.

Our business, operations,
and financial condition are subject to certain risks and uncertainties. Should one or more of these risks or
uncertainties materialize, or should any underlying assumptions prove
incorrect, our actual results will vary, and may vary materially from those
anticipated, estimated, projected or expected.
Among the key factors that may have a direct bearing on our business,
operations, or financial condition are the factors identified below:

Our products may be subject to recall or product liability
claims.

Our products are used in connection with invasive
procedures and in other medical contexts in which it is important that those
products function with precision and accuracy.
If our products do not function as designed, or are designed improperly,
we may choose to or be forced by regulatory agencies to withdraw such products
from the market. In addition, if medical
personnel or their patients suffer injury as a result of any failure of our
products to function as designed, or an inappropriate design, we could be
subject to lawsuits seeking significant compensatory and punitive damages. Any product recall or lawsuit seeking
significant monetary damages may have a material adverse effect on our
business, operations or financial condition.

We generally offer a limited
warranty for product returns which are due to defects in quality and
workmanship. We attempt to estimate our potential liability for future product
returns and we establish reserves on our financial statements in amounts that
we believe will be sufficient to address our warranty obligations; however, our
actual liability for product returns may significantly exceed the amount of our
reserves. If we underestimate our potential liability for future product
returns, or if unanticipated events result in returns or warranty obligations
that exceed our historical experience, our financial condition and operating
results could be materially and adversely affected.

We may
be unable to protect our proprietary technology or may infringe on the
proprietary technology of others.

Our ability to
remain competitive is dependent, in part, upon our ability to prevent other
companies from using our proprietary technology incorporated into our products. We seek to protect our technology through a
combination of patents, trademarks, and trade secrets, as well as licenses,
proprietary know-how and confidentiality agreements. We may be unable, however, to prevent others
from using our proprietary information, or continue to use such information our
self, for numerous reasons, including the following, which could have a
material adverse effect on the Companys business, operations, or financial
condition:

13

·Our
issued patents may not be sufficiently broad to prevent others from copying our
proprietary technologies;

·Our
issued patents may be challenged by third parties and deemed to be overbroad or
unenforceable;

·Our
products may infringe on the patents or other intellectual property rights of
other parties, requiring us to alter or discontinue our manufacture or sale of
such products;

·Costs
associated with seeking enforcement of our patents against infringement, or
defending our self against allegations of infringement, may be significant;

·Our
pending patent applications may not be granted for various reasons, including
over breadth or conflict with an existing patent; and

·Other
persons may independently develop, or have developed, similar or superior
technologies.

Termination
of relationships with our suppliers, or failure of such suppliers to perform,
could disrupt our business.

We
rely on raw materials, component parts, finished products, and services
supplied by outside third parties in connection with our business. For example, substantially all of our
products are sterilized by a few entities.
In addition, some of our products are manufactured or assembled by third
parties. If a supplier of significant
raw materials, component parts, finished goods, or services were to terminate
its relationship with us, or otherwise cease supplying raw materials, component
parts, finished goods or services consistent with past practice, our ability to
meet our obligations to our end customers may be disrupted. A disruption with respect to numerous products,
or with respect to a few significant products, could have a material adverse
effect on our business, operations or financial condition.

We may
be unable to successfully manage growth, particularly if accomplished through
acquisitions.

Successful
implementation of our business strategy will require that we effectively manage
any associated growth. To manage growth
effectively, our management will need to continue to implement changes in
certain aspects of our business, to improve our information systems and
operations to respond to increased demand, to attract and retain qualified
personnel, and to develop, train, and manage an increasing number of
management-level and other employees.
Growth could place an increasing strain on our management, financial,
product design, marketing, distribution and other resources, and we could
experience operating difficulties. Any failure to manage growth effectively
could have a material adverse effect on our results of operations and financial
condition.

To
the extent that we grow through acquisition, we will face the additional
challenges of integrating our current operations, culture, informational
management systems and other characteristics with that of the acquired
entity. We may incur significant
expenses in connection with negotiating and consummating one or more
transactions, and we may inherit certain liabilities in connection with each
acquisition. In addition, we may not
realize competitive advantages, synergies or other benefits anticipated in
connection with such acquisition(s). If
we do not adequately identify targets for, or manage issues related to our
future acquisitions, such acquisitions may have a negative adverse effect on
our business and financial results.

Substantially
all of our products are devices, as defined in the Federal Food, Drug and
Cosmetic Act, (FDA) and the manufacture, distribution, record keeping,
labeling and advertisement of our products are subject to regulation by the FDA
in the United States and its equivalent regulatory agencies in various foreign
countries in which our products are manufactured, distributed, labeled, offered
and sold. Further, we are subject to
continual review and periodic inspections at our current facilities with
respect to the FDAs Quality System Regulations and similar requirements of
foreign countries. In addition, we are
subject to certain export control restrictions governed

14

by the U.S.
Department of the Treasury and may be governed by other regulatory agencies in
various foreign countries in which products are exported. Our business, operations, or financial
condition could be adversely affected if we are found to be out of compliance
with governing regulations. If such
regulations are amended to become more restrictive and costly to comply with,
the costs of compliance could have a material adverse effect on our business,
operations, or financial condition.

A
significant portion of our revenues are derived from a few products and
procedures.

A
significant portion of our revenues are attributable to sales of our inflation
devices. During the year ended December
31, 2006, sales of our inflation devices (including inflation devices sold in
custom kits and through OEM channels) accounted for approximately 31% our total
revenues. Any material decline in market
demand for our inflation devices could have an adverse effect on our business,
operations or financial condition.

In
addition, the products that have accounted for a majority of our historical
revenues are designed for use in connection with a few related medical
procedures, including angioplasty, stent placement procedures, and spinal
procedures. If subsequent developments
in medical technology or drug therapy make such procedures obsolete, or alter
the methodology of such procedures so as to eliminate the usefulness of our
products, we may experience a material decrease in demand for our products and
experience deteriorating financial performance.

We
may be unable to compete in our markets, particularly if there is a significant
change in relevant practices and technology.

The
market for each of our products is highly competitive. We face competition from many companies, many
of which are larger, better established and have greater financial, technical
and other resources and greater market presence than we do. Such resources and market presence may enable
our competition to more effectively market competing products or to market
competing products at reduced prices in order to gain market share.

In
addition, our ability to compete successfully is dependent, in part, upon our
response to changes in technology and to our efforts to develop and market new
products which achieve significant market acceptance. Competing companies with substantially
greater resources than us are actively engaged in research and development of
diagnostic and interventional methods, treatments, and procedures that could
limit the market for our products and eventually make certain products
obsolete. A reduction in the demand for
a significant number of our products, or a few key products, could have a
material adverse effect on our business, operations or financial condition.

The
market price of our common stock has been, and may continue to be, volatile.

The
market price of our common stock has been, and may continue to be, highly
volatile for various reasons, including the following, which could have a
material adverse effect on our business,
operations or financial condition:

·Our
announcement of new products or technical innovations, or similar announcements
by our competitors;

·Development
of new procedures that use, or do not use, our technology;

Fluctuations
in the rate of exchange between the Euro and GBP relative to the value of the
U.S. Dollar could have a negative impact on our margins and financial
results. For example, during 2006, the
exchange rate between the Euro and the U.S. Dollar resulted in an increase in
our gross revenues of approximately $21,000 and .01% in gross profit.

For
the year ended December 31, 2006, approximately $20 million, or 10.5%, of our
sales were denominated in Euros and GBP.
If the rate of exchange between the Euro and the GBP declines, against
the U.S. Dollar, we may not be able to increase the prices we charge our
European customers for products whose prices are denominated in Euros and
GBP. Furthermore, we may be unable or
elect not to enter into hedging transactions which could mitigate the effect of
declining exchange rates. As a result,
if the rate of exchange between Euros and GBP declines, against the U.S.
Dollar, our financial results may be negatively impacted.

We
are dependent upon key personnel.

Our
success is dependent on key management personnel, including Fred P.
Lampropoulos, our Chairman of the Board, President and Chief Executive
Officer. Mr. Lampropoulos is not subject
to any agreement prohibiting his departure, and the Company does not maintain
key man life insurance on his life. The
loss of Mr. Lampropoulos, or of certain other key management personnel, could
have a material adverse effect our business and operations. Our success also depends on, among other
factors, the successful recruitment and retention of key operating,
manufacturing, sales and other personnel.

We
are subject to work stoppage, transportation and related risks.

We
manufacture products at various locations in the United States and in Ireland
and sell our products worldwide. We
depend on third-party transportation companies to deliver supplies necessary to
manufacture our products from vendors to our various facilities and to move our
products to customers, operating divisions, and other subsidiaries located
worldwide. Our manufacturing operations,
and the operations of the transportation companies on which we depend, may be
adversely affected by natural disasters or significant human events, such as a
war, terrorist attack, riot, strike, slowdown or similar event. Any disruption in our manufacturing or
transportation could materially adversely affect our ability to meet customer
demands or our operations.

Limits
on reimbursement imposed by governmental and other programs may adversely
affect our business.

The
cost of a significant portion of medical care is funded by governmental, social
security or other insurance programs.
Limits on reimbursement imposed by such programs may adversely affect
the ability of hospitals and others to purchase our products. In addition, limitations on reimbursement for
procedures which utilize our products could adversely affect sales.

Item 1B.Unresolved
Staff Comments.

There are no outstanding SEC Staff comments.

Item 2.Properties.

We
own approximately 23 acres of real property situated in the city of South
Jordan, Utah, surrounding an additional ten acres of leased real property on
which our principal office and manufacturing facility is located. We sold the ten-acre site to an unrelated
developer in order to facilitate construction of such facility and entered into
a 25-year lease agreement (beginning in 1995) to finance the new facility. Monthly lease payments attributable to the
ten-acre parcel are approximately $138,000.
We also hold an option to purchase the facility, exercisable at market value
after 25 years. During 2004, we acquired
an additional four acres of property south of and adjacent to our current
property in South Jordan, Utah. During
2005, we acquired an additional seven acres of property just west

16

of our current
facility in South Jordan, Utah. The
acquisition of these additional properties will potentially enable us to expand
our operations in the future as property surrounding our existing facilities is
limited due to increased development over the past few years. At the end of 2004, we completed a 47,000
square foot facility in South Jordan, Utah. This facility is used primarily for research,
development and pilot production clean rooms.
We also intend to use this ancillary facility to relocate our production
of sensors from Santa Clara, California.
We completed a 140,000 square foot facility located in South Jordan,
Utah in September of 2005. This facility
is used for injection and insert molding production, an automated finished
goods warehouse, and management information system employees. The new facilities
in South Jordan, Utah are designed to increase our clean room production
capacity and administrative office space to meet current and projected demand
that we anticipate we will experience over the next several years.

We
own a building of approximately 65,000 square feet with approximately three
acres of land, in Galway, County Galway, Republic of Ireland, which serves as
our principal office and manufacturing facility for our European
operations. The facility houses a
research and development team, which developed our diagnostic guide wire, and
is working to develop other new products.
We also manufacture other products at the Galway facility. During 2004, we completed a
40,000-square-foot expansion of our Galway facility. This expansion is designed to provide
additional production capacity and office space to meet our current and
anticipated needs. Our Galway property
has been improved and equipped on terms favorable to us in connection with
economic development incentives and grants provided by the Irish government.

We
lease a manufacturing facility of approximately 69,000 square feet located in
Murray, Utah. The Murray facility is
used for production of several of our products.
The leases related to three of the units at the Murray facility expired
in 2004, and leases related to six of these units will expire in 2007. The aggregate monthly lease payments on these
Murray facilities are approximately $36,000 and will expire in 2007.

We
also lease 8,500 square feet of manufacturing and office space located in Santa
Clara, California for the production of sensors. This lease runs through August 2007 at a
monthly cost of approximately $14,000.
We do not currently plan to renew our Santa Clara, California lease, as
we currently intend to relocate our sensor operations to a new facility that
was built in South Jordan, Utah during 2005.
We currently anticipate that this move which began during the second
half of 2006 will be completed in 2007.
We intend to upgrade our wafer fabrication production to improve
capacity and quality and reduce costs at our South Jordan facility prior to
closing our Santa Clara, California operation.

We
own approximately 19 acres of land and a 75,000 square foot building in
Angleton, Texas. The facility is used
for the production of catheter related products.

We own
approximately 12 acres of land and a 100,000 square foot building in Chester,
Virginia. The facility is used for
production of custom procedure trays used in the medical industry.

We
recently relocated our MCTec operations to a manufacturing facility of
approximately 10,000 square feet located in Venlo, The Netherlands. The facility is used for the coating of wires
and tubing for medical devices. The
lease will expire in January of 2011.
The current monthly lease payment is approximately $8,000. In addition, we purchased approximately three
acres of land in Beek, The Netherlands.

We
believe that our existing and proposed facilities will generally be adequate
for our present and future anticipated levels of operations.

Item 3.Legal
Proceedings.

In the
course of conducting its business operations, we are, from time to time,
involved in litigation and other disputes.
Our management does not currently anticipate that any pending litigation
or dispute against us will have a materially adverse effect on our business,
operations or financial condition.

17

Item 4.Submission
of Matters to a Vote of Security Holders.

No
matters were submitted to a vote of security holders during the fourth quarter
of the year ended December 31, 2006.

PART II

Item 5.Market
for Registrants Common Equity and Related Shareholder Matters and Issuer
Purchases of

Equity Securities.

MARKET
PRICE FOR THE COMMON STOCK

Merits common
stock (the Common Stock) is traded on the NASDAQ National Market System under
the symbol MMSI. The following table
sets forth high and low sale prices for the Common Stock for the periods
indicated.

For the year ended December 31, 2006

High

Low

First Quarter

$

15.00

$

11.90

Second Quarter

$

13.76

$

10.60

Third Quarter

$

14.74

$

12.42

Fourth Quarter

$

16.79

$

12.66

For the year ended December 31, 2005

High

Low

First Quarter

$

15.05

$

11.46

Second Quarter

$

15.86

$

11.67

Third Quarter

$

18.32

$

15.14

Fourth Quarter

$

17.70

$

11.60

OUTSTANDING SHARES AND NUMBER OF SHAREHOLDERS

As of March 5, 2007 the number of shares of Common
Stock outstanding was 27,649,986 held by approximately 188 shareholders of
record, not including shareholders whose shares are held in securities position
listings.

DIVIDENDS

We have never declared or paid cash dividends on the
Common Stock. We presently intend to
retain any future earnings for use in our business and, therefore, do not
anticipate paying any dividends on the Common Stock in the foreseeable
future. In addition, our revolving line
of credit contains covenants prohibiting the declaration and distribution of a
cash dividend at any time prior to the termination of such line of credit.

18

Performance
Graph

The following graph compares the performance of Merits common stock with the
performance of the Nasdaq Stock Market (US Companies) and Nasdaq Stocks (SIC
3840-3849 US Companies - Surgical, Medical and Dental Instruments and Supplies)
for a five year period by measuring the changes in common stock prices from
December 31, 2001 to December 31, 2006.

|

12/2001

12/2002

12/2003

12/2004

12/2005

12/2006

Merit Medical System
Inc.

$

100

$

133

$

265

$

182

$

144

$

188

Nasdaq Stock Market (US
Companies)

$

100

$

69

$

103

$

112

$

115

$

126

Nasdaq Stocks (SIC 3840-3849 US Companies)

$

100

$

82

$

119

$

140

$

154

$

163

The stock performance
graph assumes for comparison that the value of the Companys Common Stock and
of each index was $100 on December 31, 2001 and that all dividends were
reinvested. Past performance is not
necessarily an indicator of future results.

(2)Consists
of 406,361 shares available to be issued under our Employee Stock Purchase
Plans and 1,536,040 shares available to be issued under our Stock Incentive
Plans.

(3)See
Note 10 to our consolidated financial statements set forth in Item 8 of this
report for additional information regarding these plans.

(4)Consist
of warrants issued in the acquisition of MedSource in 2004  See Note 2 to our
consolidated financial statements set forth in Item 8 of this report for
additional information regarding this acquisition.

20

Item 6.Selected
Financial Data (in thousands).

Years Ended December 31,

2006

2005

2004

2003

2002

OPERATING DATA:

Net Sales

$

190,674

$

166,585

$

151,398

$

135,953

$

116,227

Cost of Sales

117,596

97,493

83,908

75,230

67,712

Gross Profit

73,078

69,092

67,490

60,723

48,515

Operating Expenses:

Selling, general
and administrative

45,486

38,579

35,071

30,468

27,732

Research and
development

8,582

6,992

5,079

4,626

4,008

Total operating
expenses

54,068

45,571

40,150

35,094

31,740

Other Operating Income

Gain on sale of
land

508

Income From Operations

19,010

23,521

27,340

26,137

16,775

Other Income(Expense):

Litigation
settlement

100

475

Interest income

250

491

556

386

97

Interest expense

(12

)

(18

)

(6

)

(10

)

(94

)

Miscellaneous
income (expense)

(64

)

(94

)

16

34

(16

)

Other incomenet

174

379

666

885

(13

)

Income before income
taxes

19,184

23,900

28,006

27,022

16,762

Income Tax Expense

6,883

8,122

10,074

9,727

5,452

Net Income

$

12,301

$

15,778

$

17,932

$

17,295

$

11,310

Earnings Per Common
Share:

Diluted

$

0.44

$

0.57

$

0.65

$

0.64

$

0.43

Average Common Shares:

Diluted

28,245

27,847

27,691

27,034

26,238

BALANCE SHEET DATA:

Working capital

$

54,972

$

43,693

$

54,944

$

56,931

$

34,582

Total assets

182,668

162,247

139,877

107,301

78,305

Long-term debt

0

2

5

0

17

Stockholders equity

$

151,212

$

132,484

$

111,052

$

88,244

$

63,399

During the quarter ended
December 31 2006, we determined it was not likely that we would pursue the
product associated with the intellectual property and assets acquired from
Sub-Q due to other priorities and opportunities. Therefore, we recorded an impairment charge
of approximately $929,000, during the quarter primarily relating to
intellectual property assets acquired from Sub-Q Inc. in March, 2005.

During
the quarter ended December 31, 2005, we adopted Statement of Financial
Accounting Standards (SFAS)
No. 151,Inventory Costsandrecorded additional expenses to cost of sales of $415,000, research and
development expense of $83,000 and selling, general and administrative expense
of $37,000.

21

During the year ended
December 31, 2004, we accrued severance costs totaling approximately $663,000
related to the termination of certain executive employees.

Item 7.Managements
Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

During 2006, we released
several new products, including the MultiPACK plus catheters, PAL pen &
labeling system, S-Mak catheter, Revolution securement device and the
Resolve® locking catheter. In addition,
we made two product acquisitions: the
Honor® hemostasis valve from Millimed, and the Futura® safety scalpel from
Hypoguard. The most significant product
release of 2006 was the Resolve® locking catheter. The Resolve® locking catheter offers higher
gross margins than our existing corporate gross margins, and we expect this
product will help to improve our 2007 sales growth. We continued to see our gross margins
decline during 2006 over the prior year.
In an effort to lower product costs, we moved the manufacturing of one
of our product lines to Mexico during 2006 and have identified two other
product lines that we will move to Mexico during the first half of 2007. During 2007, the Company will continue to
review product lines that can be transferred to Mexico or other low cost
alternative sites in an effort to reduce product costs and improve our overall
gross margins.

For the year ended December
31, 2006, we reported net sales of $190.7 million, up $24.1 million or 14% over
the comparable period in 2005. Net sales
growth in 2006 was primarily driven by increased sales of our stand-alone
products and our procedure tray business.

Our gross margins as a
percentage of sales were down to 38.3% for the year ended December 31, 2006,
compared to 41.5% for year ended December 31, 2005. This decline resulted primarily from expenses
incurred during the second half of 2005 for new facilities and related costs
(i.e. utilities, maintenance, cleaning and taxes) and equipment. Gross margins
in 2006 were also affected by the increased cost of direct labor, increased
health insurance costs and the adoption of SFAS No. 123(R).

Net income decreased for the
year ended December 31, 2006 to $12.3 million, compared to $15.8 million for
the prior year period. When compared to
the prior year, net income for the year ended December 31, 2006 was positively affected
by increased sales volumes, and negatively affected by lower gross margins;
higher research and development spending; $1.5 million attributable to the
adoption of SFAS No. 123(R) and increased selling, general, and administrative
expenses, which included an impairment charge of approximately $929,000
relating to the intellectual property acquired from Sub-Q Inc.

RESULTS
OF OPERATIONS

The following table sets
forth certain operational data as a percentage of sales for the periods
indicated:

2006

2005

2004

Sales

100.0

%

100.0

%

100.0

%

Gross profit

38.3

41.5

44.6

Selling, general
and administrative expenses

23.9

23.2

23.2

Research and
development expenses

4.5

4.2

3.4

Income from
operations

10.0

14.1

18.1

Income before
income tax expense

10.1

14.3

18.5

Net income

6.5

9.5

11.8

Our net sales increased by
$24.1 million, or 14.5%, in 2006, compared to an increase of $15.2 million, or
10%, in 2005, and an increase of 15.4 million, or 11.4%, in 2004. We report sales in four product categories. Listed below are the sales relating to these
product categories for the years ended December 31, 2006, 2005 and 2004:

22

Twelve Months Ended

December 31,

% Change

2006

% Change

2005

% Change

2004

2003

Inflation
devices

9

%

$

56,978

5

%

$

52,319

11

%

$

49,672

$

44,583

Custom kits
& procedure trays

15

%

56,009

15

%

48,740

9

%

42,533

39,044

Stand-alone
devices

19

%

55,824

8

%

46,900

8

%

43,226

39,919

Catheters

17

%

21,863

17

%

18,626

29

%

15,967

12,407

Total

14

%

$

190,674

10

%

$

166,585

11

%

$

151,398

$

135,953

Our revenues increased
during 2006, notwithstanding the fact that the markets for many of our products
are experiencing slight pricing declines as our customers try to reduce their
costs. Substantially all of the increase
in our revenues was attributable to increased unit sales, except for a slight
increase in revenues attributable to an increase in the exchange rate between
the Euro and the U.S. Dollar which increased sales by .01% in 2006 compared to
2005, .09% in 2005 compared to 2004, and 1.2% in 2004 compared to 2003. Unit growth for 2006, 2005, and 2004 resulted
primarily from a procedural growth rate of approximately 6-8%. In addition, unit growth in 2006, 2005 and
2004 was attributable, in part, to our introduction of new products which
accounted for approximately 5%, 4%, and 5%, respectively, for total sales for
such periods. Sales growth for 2006 was
also favorably effected by an increase of 3% related to acquisitions, which was
primarily driven by the acquisition of MCTec made in December of 2005. Total sales from MCTec in 2006 were
approximately $4.0 million. Other unit
growth increases in 2006, 2005, and 2004 came from market share gains. International sales in 2006 were
approximately $53.7 million, or 28% of total sales; international sales in 2005
were approximately $45.3 million, or 26% of total sales; and international
sales in 2004 were approximately $37.5 million, or 25% of total sales. These increases primarily resulted from
greater acceptance of our products in international markets, ongoing growth in
our European direct sales, and increased sales related to improvement in the
exchange rate between the Euro and the U.S. Dollar, as discussed above. Our total direct sales in France, Germany,
the U.K., Belgium, The Netherlands and Ireland were $20.0 million,
$20.0 million, and $18.9 million in 2006, 2005, and 2004, respectively.

Our gross profit as a
percentage of sales was 38.3%, 41.5%, and 44.6%, in 2006, 2005, and 2004,
respectively. The decline in gross
margins in 2006 resulted primarily from expenses incurred during the second
half of 2005 for new facilities and related costs (i.e. utilities, maintenance,
cleaning and taxes) and equipment. Gross margins in 2006 were also affected by the
increased cost of direct labor, increased health insurance costs, and our
adoption of Statement of Financial Accounting Standard No. 123(R), Share-Based
Payment, (SFAS No. 123(R)), effective January 1, 2006, increased procedure
tray sales in 2006, which have lower gross margins than the Companys overall
gross margins. The decline in gross
margins in 2005 resulted primarily from new facilities and equipment, increased
cost of direct labor, higher overhead expenses (i.e. utilities, maintenance,
cleaning and taxes) and new product launches.
The decline in gross margins for 2005 was also affected by negative
margins in the new procedure tray business we acquired from MedSource during
the fourth quarter of 2004. The effect
was a reduction of gross margins by 1.4% for 2005. Sales of procedure trays contributed 2.4% to
our total sales for 2005. The slight
decrease in gross margin percentage in 2004, compared to 2003, was primarily
the result of a slight increase in the standard costs per unit as the result of
increased manufacturing costs.

Our selling, general, and
administrative expenses increased $6.9 million, or 18% in 2006 over 2005; $3.5
million, or 10% in 2005 over 2004; and $4.6 million, or 15.1% in 2004 over
2003. The increase in selling, general,
and administrative costs in 2006 as a percent of sales, was primarily the
result of an impairment charge of approximately $929,000, primarily relating to
intellectual property assets acquired from Sub-Q Inc. in March 2005,
approximately $945,000 attributable to the adoption of SFAS No. 123R and a full
year of costs of the 17 additional sales representatives hired in the second
half of 2005. The increase in selling,
general, and administrative expenses in 2005 as a percent of sales, compared to
2004, was due primarily to costs associated with severance for certain
executive employees $493,000, the buy-out of a distribution agreement $200,000,
the hiring of 17 additional sales people, and the sample expense related to new
product introductions. The increase in
selling, general and administrative costs for 2004 as a percent of sales,
compared to 2003, was primarily the result of approximately $674,000 in costs
associated with our efforts to comply with the requirements of Section 404 of
the Sarbanes-Oxley Act of 2002 and severance costs of approximately $663,000
related to the termination of certain executive employees.

23

Our research and development
(R&D) expenses for 2006 increased 22.7% to $8.6 million, compared to $7.0
million in 2005; R&D expenses for 2005 increased 37.7% to $7.0 million,
compared to $5.1 million for 2004; and
R&D expenses increased 9.8% to $5.1 million, compared to $4.6 million in
2003. The increase in R&D expenses
in 2006, 2005, and 2004 was related primarily to R&D head count additions
and indirect costs to support an increase in the number of new products we
launched. Our R&D expenses as a
percentage of sales were 4.5% for 2006 and 4.2% for 2005 and 3.4% for 2004.

Our effective tax rates for
2006, 2005, and 2004 were 36%, 34%, and 36%, respectively. The increase in the effective tax rate for
2006 over 2005 and the decrease in the effective tax rate for 2005 over 2004
was the primarily the result of our reimbursement of costs incurred by our Irish
subsidiary for the development of two new products which are taxed at a lower
income tax rate than the U.S. The
effective tax rate for 2004 and 2003 remained unchanged at 36%.

Our other income for 2006,
2005, and 2004 was approximately $174,000, $379,000, and $666,000,
respectively. The decrease in other
income for 2006 over 2005 was primarily the result of a decrease in interest
income of approximately $241,000. The
decrease in other income for 2005 over 2004 was affected by a net decrease in a
litigation settlement of $100,000, an increase in foreign currency transaction
loss of approximately $67,000 and a decrease in interest income of
approximately $65,000. The decrease in
other income for 2004 over 2003 was affected by a net decrease in a litigation
settlement of approximately $375,000, offset by an increase in 2004 of interest
income of approximately $170,000.

Our net income for 2006,
2005, and 2004 was approximately $12.3 million, $15.8 million and $17.9
million, respectively. Net income for
2006 and 2005 was negatively affected by lower gross margins, higher research
and development spending, increased selling, general and administrative
expenses, and positively affected by increased sales volumes. Net income for 2004 over 2003 was favorably
affected by higher sales and gross profits.

Under SFAS No. 123(R), which
we adopted effective January 1, 2006, we are required to apply the expense
recognition provisions of this pronouncement to equity-based incentives such as
stock options. In anticipation of this
pronouncement, during 2005 and 2004 we made grants to management and employees
for a total of 774,976 and 807,296 shares of our common stock, respectively,
which vested immediately upon grant, rather than over five years as has been
our historical practice. Additionally,
subsequent to December 31, 2005, we accelerated the vesting on 427,448
options with an exercise price of $21.67, which was in excess of the current
market price. The immediate vesting of
options and the acceleration of options which have exercise prices that are above
the current market value of the Common Stock are anticipated to reduce our
compensation expense by approximately $2.8 million and $3.2 million,
respectively, over the next four years under the provisions of FAS No. 123(R).

Effective January 1, 2002, we
adopted SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). Under SFAS No. 142, we no longer amortize
goodwill from business acquisitions, but review annually the impairment of
goodwill, or more frequently if impairment indicators arise. We completed our initial testing of goodwill
as of January 1, 2002 and determined that there was no impairment. We have elected to perform our annual testing
of goodwill impairment as of July 1 of the applicable fiscal year. As of July 1, 2006, we updated our testing of
goodwill for impairment and determined that there was no impairment. However, during the fourth quarter of 2006,
we determined that it was unlikely we would pursue the product associated with
the intellectual property acquired from Sub-Q due to other priorities and
opportunities. Therefore, we recorded an
impairment charge of approximately $929,000 in selling, general and
administrative expense for 2006, which included approximately $500,000 related
to goodwill. The remaining unamortized
amount of goodwill at December 31, 2006, was approximately $7.5 million.

LIQUIDITY
AND CAPITAL RESOURCES

Capital Commitments

The following table
summarizes our capital commitments and contractual obligations as of December
31,

24

2006, including operating
lease payments, and office lease payments, as well as the future periods in
which such payments are currently anticipated to become due:

Contractual Obligations

Payment due by period (in thousands)

Total

Less than 1 Year

1-3 Years

4-5 Years

After 5 Years

Operating leases

23,031

2,406

3,776

3,421

13,428

Royalty
obligations

2,160

594

738

288

540

Total contractual cash
obligations

25,191

3,000

4,514

3,709

13,968

Additional information
regarding our capital commitments and contractual obligations, including
royalty payments, is contained in notes 7, 8, and 12 of the Notes to our
consolidated financial statements, set forth in Item 8.

Our working capital for
2006, 2005, and 2004 was $55.0 million, $43.7 million, and $54.9 million,
respectively. The increase in working
capital for 2006 over 2005 was primarily the result of an increase in cash flow
from operations of $8.0 million and a reduction in the amount of capital
expenditures made, when compared to 2005.
The decrease in working capital for 2005 over 2004 was primarily the
result of cash being used to fund the construction of our new facilities in
South Jordan, Utah, and Galway, Ireland; the purchase and remodel of our
facility in Chester, Virginia; and the acquisitions of MCTec, MedSource and
Sub-Q. As of December 31, 2006, we had a
current ratio of 3.7 to 1. We generated
cash from operations for 2006, 2005, and 2004 in the amount of $19.1 million,
$11.2 million, and $26.5 million respectively.
On December 7, 2006, we entered into an unsecured loan agreement with
Bank of America, N.A. (the Bank), whereby the Bank agreed to provide us a
line of credit in the amount of $30,000,000.
Prior to December 7, 2006, the Company maintained a long-term revolving
credit facility (the Facility) with a Zions First National Bank. The Facility had a credit limit of $500,000
for years 2005 and 2006. The Facility
expired on June 30, 2006. On
December 8, 2006, we entered into an unsecured loan agreement with Zions First
National Bank (the Bank), whereby the Bank agreed to provide us a line of
credit in the amount of $1,000,000. We
had $0 outstanding under our lines of credit as of December 31, 2006.

Historically, we have
incurred significant expenses in connection with product development and
introduction of new products.
Substantial capital has also been required to finance the increase in
our receivables and inventories associated with our increased sales. During 2006, we spent approximately $9.6
million for various production equipment, approximately $2.1 million on
building and leasehold improvements, and approximately $1.7 million on the
purchase of a piece of land in The Netherlands to build a distribution
facility. During 2005, we paid
approximately $14.6 million for payments to complete the construction of our
new Molding, Technology and Logistics (MTL) building and cafeteria expansion
in South Jordan, Utah. In addition,
during 2005, we spent approximately $4.7 million to purchase a 102,000 square
foot facility and add a clean room to our facility in Chester, Virginia, and
approximately $1.5 million to purchase seven acres of land just west of our
current South Jordan, Utah facilities.
Also during 2005, we made significant investments were made for new
equipment including approximately $1.8 million in molding equipment,
approximately $3.4 million for an automated warehouse shipping system, and
approximately $2 million for automated production equipment. Our principal source of funding for these and
other expenses has been cash generated from operations, sales of equity, cash
from loans on equipment, and bank lines of credit. We currently believe that our present sources
of liquidity and capital are adequate for current operations and for the
foreseeable future.

Critical Accounting Policies and
Estimates

The SEC has requested that
all registrants address their most critical accounting policies. The SEC has indicated that a critical
accounting policy is one which is both important to the representation of the
registrants financial condition and results and requires managements most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We base our estimates on past experience and
on various other assumptions our management believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results will
differ, and may differ materially from these estimates under different
assumptions or conditions. Additionally,
changes in accounting estimates could

25

occur in the future from
period to period. Our management has
discussed the development, and selection of our most critical financial
estimates with the audit committee of our Board of Directors. The following paragraphs identify our most
critical accounting policies:

Inventory
Obsolescence Reserve:
Our management reviews on a regular basis inventory quantities on hand
for unmarketable and/or slow-moving products that may expire prior to being
sold. This review of inventory
quantities for unmarketable and/or slow moving products is based on estimates
of forecasted product demand prior to expiration lives. If market conditions become less favorable
than those projected by our management, additional inventory write-downs may be
required. We believe that the amount
included in our obsolescence reserve has been a historically accurate estimate
of the unmarketable and/or slow moving products that may expire prior to being
sold. Our obsolescence reserve was
approximately $2.1 million as of December 31, 2006.

Allowance
for Doubtful Accounts:
A majority of our receivables are with hospitals which, over our
history, have demonstrated favorable collection rates. Therefore, we have experienced relatively
minimal bad debts from hospital customers.
In limited circumstances we have written off minimal bad debts as the
result of the termination of foreign distributors. The most significant write-offs over our
history have come from U.S. packers who bundle our products in surgical trays.

We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make required
payments. The allowance is based upon
historical experience and a review of individual customer balances. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. Our bad debt reserve was $560,181 at December
31, 2006, which is in line with historical collection experience.

Stock-based Compensation. Effective January 1, 2006, we adopted SFAS
No. 123(R).
SFAS No. 123(R) requires that the fair value compensation cost relating
to share-based payment transactions be recognized in financial statements. Under the provisions of SFAS No.123(R),
share-based compensation cost is measured at the grant date, based on the fair
value of the award, and is recognized over the employees requisite service
period. The fair value of our stock
options is estimated using a Black-Scholes option valuation model. Our Employee Stock Purchase Plan (ESPP) has
a 5% discount based on the date of distribution and under the guidelines of
SFAS No.123(R) the ESPP does not require a compensation cost to be
recorded. We adopted the fair value
recognition provisions of SFAS No. 123(R) using the modified prospective
transition method. Under this transition
method, stock-based compensation cost is recognized beginning January 1, 2006
for all options granted after the date of adoption as well as the unvested
portion of previously granted options based on the estimated fair value. Prior to January 1, 2006 we accounted for
employee stock option grants and ESPP purchases using the intrinsic method in
accordance with Accounting Principles Board (APB) Opinion No. 25 Accounting
for Stock Issued to Employees and accordingly associated compensation expense,
if any, was measured as the excess of the underlying stock price over the
exercise price on the date of grant. We
also complied with the disclosure option of SFAS No. 123 Accounting
for Stock Based Compensation, and SFAS no. 148 Accounting for Stock-Based CompensationTransition and Disclosure
and made pro forma footnote disclosures.
Pro forma net income and pro forma net income per share disclosed in the
footnotes to our consolidated financial statements were estimated using a
Black-Scholes option valuation model.

For the twelve month period ended December 31, 2006,
the adoption of SFAS No. 123(R) resulted in incremental stock-based
compensation expense of $1,502,000 ($399,000 in cost of goods sold, $158,000 in
research and development and $945,000 in selling, general and administrative
expense). We recognize stock-based compensation expense (net of a forfeiture
rate) for those awards which are expected to vest on a straight-line basis over
the requisite service period. We estimated
the forfeiture rate based on our historical experience and expectations about
future forfeitures.

Income
Taxes. Management
calculates its income tax provision, both current and deferred, based upon
various complex estimates and interpretations of income tax laws and
regulations in the various countries in which we do business. In our opinion, we have made adequate
provisions for income taxes for all years subject to audit by various taxing
authorities. Although we believe our
estimates are reasonable, we can make no assurance that the final tax outcome
of these matters will not be different from that which we have reflected in our
historical income

26

tax provisions and accruals.
Such differences could have a material impact on our income tax provision and
operating results in the period in which we make such determination.

Item 7A.Quantitative
and Qualitative Disclosure About Market Risk.

Our principal market risk relates to changes in the
value of the Euro and Great Britain Pound (GBP) relative to the value of the
U.S. Dollar. Our consolidated financial
statements are denominated in, and our principal currency is, the U.S.
Dollar. A portion of our revenues ($20.0
million, representing approximately 10.5% of aggregate revenues), for the year
ended December 31, 2006 was attributable to sales that were denominated in
Euros and GBPs. Certain of our expenses
are also denominated in Euros and GBPs, which partially offsets risks
associated with fluctuations of exchanges rates between the Euro and GBP on the
one hand, and the U.S. Dollar on the other hand. Because of our Euro and GBP-denominated
revenues and expenses, in a year in which our Euro and GBP-denominated revenues
exceed our Euro and GBP-based expenses, the value of such Euro and
GBP-denominated net income increases if the value of the Euro and GBP increase
relative to the value of the U.S. Dollar, and decreases if the value of the
Euro and GBP decrease relative to the value of the U. S. Dollar. During the years ended December 31, 2006, the
exchange rate between the Euro and GBP against the U.S. Dollar resulted in an
increase of our gross revenues of approximately $21,000 and 0.01% in gross
profit.

At December 31, 2006, we had a net exposure
representing the difference between Euro and GBP denominated receivables and
Euro and GBP denominated payables of approximately $860,000 and $221,000,
respectively. In order to partially
offset such risks, on November 30, 2006, we entered into 30-day forward
contract for Euro and GBP. We generally
enter into similar economic transactions at various times during the year to
partially offset exchange rate risks we bear throughout the year. We do not purchase or hold derivative
financial instruments for speculative or trading purposes. During the year ended December 31, 2006 and
2005 we experienced a net loss of approximately $56,000 and $67,000,
respectively, on these transactions executed during 2006 and 2005 in an effort
to limit our exposure to fluctuations in the Euro and GBP against the U.S.
Dollar exchange rate.

Another market risk relates to variable rate
debt. As of December 31, 2006, we had no
variable rate debt. As long as we do not
have variable rate debt, our interest expense would not be affected by changes
in interest rates.

27

Item 8.Financial
Statements and Supplementary Data.

REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of
Directors and Stockholders of Merit Medical Systems Inc.:

We have audited the
accompanying consolidated balance sheets of Merit Medical Systems Inc., and
subsidiaries (the Company) as of December 31, 2006 and 2005, and
the related consolidated statements of income, stockholders equity, and cash
flows for each of the three years in the period ended December 31, 2006.
Our audits also included the financial statement schedule listed in the Index
at Item 15. These financial statements and financial statement schedule
are the responsibility of the Companys management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule
based on our audits.

We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such
consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2006 and 2005, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2006, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.

As discussed in Note 1 to
the financial statements, in 2006 the Company changed its method of accounting
for stock-based compensation to conform to Statement of Financial Accounting
Standards (SFAS) No. 123(R), Share-Based Payment (SFAS
No. 123(R)).

We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of the Companys internal control over
financial reporting as of December 31, 2006, based on the criteria
established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 14, 2007, expressed an
unqualified opinion on managements assessment of the effectiveness of the
Companys internal control over financial reporting and an unqualified opinion
on the effectiveness of the Companys internal control over financial
reporting.

·During 2006, the Company acquired certain assets of Millimed
A/S in a purchase transaction for $1,510,664. The purchase price was allocated
between fixed assets for $135,590, inventory for $419,162, other intangibles
for $49,000 and goodwill for $906,912.

Fair value of assets acquired
(including goodwill of $906,912)

$

1,510,664

Cash paid

(1,510,664

)

Liabilities assumed

None

·During 2006, the Company acquired certain assets and
other intangibles (Customer Relationships) of Hypoguard USA, Inc. in a purchase
transaction for $1,290,077. The purchase price was allocated between fixed
assets for $203,944, inventory for $119,324, other intangibles for $350,000 and
goodwill for $616,809.

Fair value of assets
acquired (including goodwill of $616,809)

$

1,290,077

Cash paid

(1,290,077

)

Liabilities assumed

None

·During 2006, the Company acquired certain know how and
formulas for producing medical products from a medical device company in a
purchase transaction for approximately $742,501. The purchase price was
allocated to other intangibles (Product Technology) for $742,501.

Fair value of assets
acquired

$

742,501

Cash paid

(742,501

)

Liabilities assumed

None

·During 2006, the Company acquired other intangibles
(Customer Relationships) of Q-Tech a Danish Company, in a purchase transaction
for $380,054. The purchase price was allocated to other intangibles (Customer
Relationships) for $380,054.

·During 2005, the Company acquired substantially all of
the assets of Sub-Q, Inc. (Sub-Q) (including know-how and certain formulas,
but excluding patents), in a purchase transaction for $1,085,785, which
included a $1.0 million promissory note advanced to Sub-Q during 2004 which was
applied to the purchase price. The
purchase price was allocated between fixed assets for $135,815, other
intangibles for $450,000 and goodwill for $499,970.

Fair value of assets
acquired (including goodwill of $499,970)

$

1,085,785

Cash paid

(85,785

)

Promissory note applied
to purchase price

(1,000,000

)

Liabilities assumed

NONE

·During 2005, the Company acquired all of
the issued and outstanding capital stock of MCTec Holding B.V, for a purchase
price of $2.4 million, net of cash acquired of $741,046. In conjunction with
the acquisition, liabilities were assumed as follows:

Fair value of assets
acquired (including goodwill of $345,356)

$

2,789,596

Cash paid, net of cash
acquired

(2,258,954

)

Accrued direct costs of
acquisition

(159,687

)

Liabilities assumed

$

370,955

·During 2004, the Company acquired all of the assets of
MedSource Packaging Concepts LLC, in a purchase transaction for $812,516. In
conjunction with the acquisition, liabilities were assumed as follows:

Fair value of assets
acquired (including goodwill of $805,381)

$

1,464,409

Cash paid

(812,516

)

Fair value of 100,000
warrants issued

(323,170

)

Liabilities assumed

$

328,723

·During 2006, 2005, and 2004, 0, 48,795 and 22,227
matured shares, (i.e. shares owned for more than six months) respectively, of
the Companys common stock were surrendered in exchange for the Companys
recording of payroll tax liabilities in the amount of approximately $0,
$691,000 and $459,000. The matured shares were valued based upon the closing
price of the Companys common stock on the surrender date.

·During 2006, 2005 and 2004, 0, 26,331 and 14,820
matured shares of the Companys common stock with a value of approximately $0,
$371,000, and $265,000, respectively, were surrendered in exchange for the
exercise of stock options.

·As of December 31, 2006, 2005, and 2004, $1.4 million,
$1.6 million and $4.0 million, respectively, of additions to plant, equipment,
and other asset purchases were accrued as accounts payable.